How Do Retiree Health Benefit Promises Affect Municipal Financing?

U.S. public sector employers have promised over $1 trillion in retiree health and other post-employment benefits (OPEBs) – an unfunded liability of the same order of magnitude as that of U.S. public pensions. We show that states with greater OPEB liabilities and lower funding ratios have higher municipal bond yields. These effects are strongest for states with high health costs, high exposure to the risk of rising health costs, and low ability to renegotiate retiree health plans. Our results suggest that investors price health risks, and plan design directly impacts the magnitude of these risks.

Keywords: Retiree Health Insurance, Municipal Bonds, Public Sector Benefits

JEL Classification: G12, H74, H75

Suggested Citation: Suggested Citation

Betermier, Sebastien and Holland, Sara B. and Wilkoff, Sean, How Do Retiree Health Benefit Promises Affect Municipal Financing? (October 15, 2023). Available at SSRN: https://ssrn.com/abstract=4602990 or http://dx.doi.org/10.2139/ssrn.4602990